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Think about inflation in three ways


12 month change CPI

Inflation is seen as a monolithic force and captured by a single number in the CPI but I think it’s more-valuable at the moment to see it in three parts:

  • Goods
  • Services
  • Commodities

Different dynamics are fueling each and for different durations.


This was the first to spark inflation, starting with a boom in used car sales early in the pandemic. Lockdowns led to rising demand for everything in the home and to work from home. Shortages appeared very early on as semi-conductors ran out. It quickly led to rising prices with retailers able to quickly sell off anything in inventory.

Currently, this is improving on many fronts. Used car prices have now declined for three straight months and apparel prices have begun to turn down. Wal-Mart and Target complained of too much inventory and that suggests discounting is coming. To be sure, the problem hasn’t gone away. Many new car models still have long wait times and the semi-conductor shortage is never-ending but there’s progress in part because demand for goods is falling as consumers shift to services.

On net, I think the market is continuing to believe that goods prices will rise further but evidence is creeping in that some prices may fall. Supply chain issues around China threaten to lengthen the timelines for some goods but overall the picture is improving.


Services inflation is heating up. If you’ve checked hotel and airline rates recently, you know exactly what I’m talking about. Travel is hot but even in things like medical care, prices are picking up (+0.6% m/m and +0.5% m/m in the past two months). The big one though is shelter, which includes rent and home ownership costs. US existing home sales prices hit a new record in today’s report and that will take some time to filter through.

There’s a lively debate about where home prices head from here. Home builder stocks have fallen around 30% this year so that gives you a good idea of what the market thinks, but rents take a long time to filter through and those should continue to tick up.

Perhaps in the autumn when the travel season slows we may see a shifting dynamic and that will be an important time and spot to watch.


This is the inflation that worries me. It hits everyone in the world nearly equally. Americans love to complain about gas prices but it’s the richest country in the world. Meanwhile, Sri Lanka defaulted this week and can’t afford to import oil.

What has me so worried about commodity prices is the long investment cycle for getting most things out of the ground. The pandemic put some of that on hold and the volatility in commodity pricing since, along with uncertainty around ESG and difficult permitting has made for a perfect storm. It’s abundantly clear to me that we’re going to be undersupplied in most commodities for years to come.

What’s especially worrisome is that if we run into a growth scare or recession in the year ahead, much-needed investment will be pushed even further out. That will ultimately lead to a larger spike later.

The persistence of commodity inflation also threatens to destabilize inflation expectations. The most-visible signs of price rises are in fuel and groceries so that will prompt people to continue to seek higher wages. So while we might see some good news on goods in the next few months and services towards the end of the year, high and rising commodity prices are here to stay.

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